Monday, October 29, 2018

The indicator that Wall Street will follow this week

The SPX index, the most representative and important of the NYSE, has been sinking more than 9% this October, losing near all YTD gains. The Nasdaq is also a loser, having its worst month since 2008. Some ideas and reasons for this sell-off, I outlined in this previous post. Now, this week, Wall Street' traders eyes will be on a specific technical indicator. It is the 10-month simple moving average or "SMA10".

The 10-month SMA indicator is equivalent to the well-known and widely used 200-day SMA, given that 10 months of sessions equals almost 200 trading days. The great advantage of the monthly is that it gives a cleaner signal and reading, free of so many false signals of breakouts, pullbacks and whipsaws that are usually presented in a daily candle chart. It is not infallible, but the 10-month SMA helps filtering out all the 'noise'. It's well known that banks and financiers use it and make their investments in the stock market based on their signal.

This indicator is for be used in indices trending up or downward, and its strategy is quite simple, almost elementary: buy (or hold your position) when the candle closes above itEach monthly candle of the chart begins with the opening of the first day of the month and is completed with the closing of the last monthly session, in this case this Wednesday 31. The key is to know if the current sell-off continues and the SPX closes below its SMA10 at the end of that day. Only 3 sessions remain and today SPX is near 100 points below it (2,658.69 vs 2,754.07). 

If happens, it is almost certain (there are no fixed rules in the trading world, only historical data) that the market will enter a correction, instability phase, so it's better to stay out of it. Exit all long-term positions, until price cross it upwards. See in the chat below the accurate sign that this indicator gave during the last crisis of 2001 and 2008. It avoid many headaches and shattered portfolios applying this very simple strategy.

It is not an infallible index (there is none) but it is reliable enough to avoid catastrophes in a portfolio. The EMA10 pointed out the two last major Wall Street crises and the best moment of return.

As a corollary, say that this indicator is applicable if you want to go long in any stock or etf. It is enough to see the entry/exit signal that it gives to proceed.

Finally, an alternative idea for trading in November (assuming the SPX below the SMA10), is through the volatility, which moves in opposition to it, doing it through the VXX etf, or with the triple speed 3X UVXY, for lovers of higher risk-reward. My usual strategy this volatile days is first buy hedge through VXX calls, waiting for the rise in volatility before the sell-off arrives, and at that moment finance the purchase of SPY puts.

The current crisis in emerging markets was also signaled by the indicator. 
Since May, its EEM index closed the month below its SMA10.